In theory, OpenIPO is a great idea. Instead of rewarding flip-happy institutional investors who are only interested in profiting from a first-day pop, companies get to raise as much money as the market will allow. And because the auction process makes it tougher for a new issue to record a first-day premium, it naturally attracts investors who are truly interested and believe in the company's long-term prospects.

And for individual investors who don't have any connections, OpenIPO goes a long way to leveling the playing field and removing the inherent unfairness of the regular IPO process. See related story.

In practice, OpenIPO passed its first major test when Salon.com
"
went public, selling 2.5 million shares at $10.50 each. While certainly not setting any off any fireworks, the deal seems to have been pulled off without a hitch. Sure, the fact that Salon's stock price fell below the offering price generated some unwelcome bad ink, but the offering was hardly an embarrassment.

Doomed to fail

But alas, my guess is OpenIPO is doomed to fail, though a more established investment bank may eventually adopt a similar objective pricing process.

Why the nay-saying? It's simple. Just think of the people W.R. Hambrecht needs to attract to make it work.

First of all, there are the issuers. Frankly, only second-tier companies that would have trouble hiring a top-tier investment bank would be willing to take the risk to use W.R. Hambrecht. You're dealing with an untested investment bank and an untested, controversial pricing process. Going public is too important to take chances -- that's one reason why investment banks have been able to get away with charging 7-percent commissions for so long.

Going public is also an important marketing event for a company. Whether it's fair or not, the market has been conditioned to expect a new issue to rise above its offering price on its debut. Deals that don't are considered failures ('broken' is the term applied to deals like Salon, which fall below the offering price) and that is hardly a good way to launch a fruitful Wall Street career.

Investment banks purposefully underprice a new issue for two main reasons: Primarily, to reward their best clients, but also to make it so that the initial bunch of shareholders in a new company are happy campers. Granted, when a stock rises too far, too fast on the first day only to fall to a more reasonable level, the effect is usually the opposite: The only people holding shares are frustrated folks who bought in at much higher prices.

But while 200 percent-plus gains are unhealthy, a more reasonable first-day pop clearly has beneficial side effects. When a stock just sits there -- or in the case of Salon, falls slightly -- it's very tough for a company to get noticed by the press or investors.

To be sure, Salon.com received a good amount of publicity because it was the first Internet company to use the OpenIPO process. But that benefit will begin to abate with each new W.R. Hambrecht deal.

Open-minded institutions?

W.R. Hambrecht will also have to attract institutional investor support, which may be difficult for a company whose mission is to "Level the Playing Field," as it declares on the front page of the OpenIPO Web site. In addition, W.R. Hambrecht lacks the name-brand analysts that can often get large institutional investors to pay attention to a stock.

Institutions accounted for 50 percent of Salon.com's IPO, according to CEO Michael O'Donnell. He attributed the interest to the fact that institutions who believed in the story were able to buy as much of the stock as they wanted, as long as they put in a high-enough bid. In regular IPOs, institutional investors feel lucky if they get 10 percent of their desired allocations, especially when a deal is oversubscribed.

But it will take a couple of more OpenIPO offerings to be sure that Salon's institutional support wasn't just due to curiosity.

In the end, of course, what will be most important is W.R. Hambrecht's track record. If Salon.com and Greatfood.com can meet expectations and grow their stock prices over the next couple of years, investors of all stripes as well as companies will have no problem using OpenIPO.

That's a big if.

IPO insanity

On its first day of trading, software developer Ariba
arba
at one point enjoyed a market cap of nearly $4 billion. The Silicon Valley company makes software that allows corporate users to automatically buy stuff like office equipment, printer paper and other mundane items via an intranet or the Internet. Web-based procurement is an idea whose time has long come, and Ariba has plenty of momentum.

But $4 billion?!? The entire business-to-business procurement market that Ariba competes in will only total $8.5 billion five years from now, according to International Data Corp. And competition looms large, including from such software dynamos as SAP and Oracle, who are just dying to find high-growth applications to sell their installed bases of customers.

Ariba is only the latest example of how the Internet public offering market refuses to accept reality. It looked for a while like sanity was returning to the market, with several offerings unable to rise above their offering prices.

Yet big first-day gains of 50 percent or more have returned. And the mere fact that many of these deals were able to get done at all shows an incredible lack of discretion that will come back to bite investors.

In case it wasn't clear, investors are beginning to discriminate among Internet stocks that are already public. As the sector rebounded from its lows in June, many of the second- and third-tier names were left behind in the rally. Some actually look like decent buys now, while most are doomed to stay where they're at or fall even lower. There are just too many names to pick from now, and more importantly, too many suspect business models.

High on the Web

A kudos must go out to the brick-and-mortar drug store chains. Earlier this year, I wrote a couple of pieces on the online pharmaceutical market and urged retailers like CVS and Walgreens to consider spinning out their online operations in order to avoid being Amazon-ed
AMZN, +0.08%
by the digital upstarts that were about to launch their own sites. See original stories, part I and part II.

Since the articles, CVS
CVS, -0.69%
and Rite-Aid
RAD, -1.19%
have made significant, yet somewhat cautionary, moves to get their Web initiatives in gear. CVS bought Soma.com, an online pharmacy that would have had little chance of success on its own given that it was competing against the richer, better connected Drugstore.com and PlanetRx.

And in June, Rite-Aid decided to take a 25-percent stake in Drugstore.com, which is prepping for its own ballyhooed public debut. The investment was a smart move that was even smarter for the Amazon-backed Web company, which will be able to benefit a great deal from Rite-Aid's infrastructure and experience, especially when it comes to pharmaceuticals. I'm not exactly sure how these three entities will all get along in the future, but that's for future discussion.

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